Younger home buyers and the Bank of Mum and Dad
Make sure you can afford it and understand any tax implications

 20 November 2020
Younger home buyers and the Bank of Mum and Dad

How easy was it for you to get onto the property ladder? 

Chances are, if you have grown-up children looking to buy their first home, it was a lot easier for you than it will be for them. 

Growing numbers of parents are seeing their adult children struggle to save enough to put down a deposit on a house, let alone afford to move up from a first home to something larger. According to the latest House Price Index (HPI), the average price the average house price in England now stands at £239,196 -  an increase of 2.5% in the year to August 2020. Equally, demand has risen, fuelled by the Help to Buy scheme, a temporary cut in stamp duty and (ironically) raised demand as people viewed houses online during the first lockdown. 

Between July 2020 and August 2020, property sales in the UK rose by 15.6% (when figures are seasonally adjusted). According to the Bank of England:

“Mortgage approvals for house purchases (an indicator of future lending) increased sharply in August to 84,700, the highest since October 2007.” [2]

However, whilst many buyers will require a deposit of at least 5%, first time buyers are likely to require a 10-15% deposit as low-deposit mortgages disappear in the wake of COVID [3]

No wonder many adults are looking for financial help from the friendliest bank in town whose staff definitely know their name, BoMaD, aka the Bank of Mum and Dad. 

 

The Bank of Mum and Dad

New research by Legal and General shows that the Bank of Mum and Dad will be a driving force behind the recovery of Britain’s housing market as buyers struggle with the economic impact of COVID-19[1]

  • 23% of 2020’s housing transactions will have been backed by the Bank of Mum and Dad, up from 19% in 2019
  • 24% of borrowers are reliant on financial support from family and friends
  • 19% of buyers expect they would have had to delay their purchase by more than five years without Bank of Mum and Dad support
  • 14% said they never would have been able to buy without the help of family or friends 
  • the Bank of Mum and Dad will still be involved in 175,000 housing transactions in 2020, with an estimated transaction value of £50.3bn

 

The key to home-buying in 2020

The Bank of Mum and Dad is set to be a key element in the driving force behind the housing sector’s recovery, as thousands of buyers press ahead with their plans to buy. Of those who’ve bought recently and received support from family and friends, 65% said it would have been ‘unlikely’ without help from the Bank of Mum and Dad.  However, whilst the Bank of Mum and Dad will lend £3.5bn to loved ones this year, it’s almost half the £6.3bn that parents, grandparents, other family and friends lent in 2019. This fall will affect the funding of 85,000 fewer home purchases. 

 

Are you planning to become a BoMaD?

If you’re planning to help your family with buying a new home, here area few points to consider.

  • Make sure you can afford it

If you’re using your pension and savings to help out, consider what impact that will have on your own retirement

  • Gift or loan?

You need to make clear from the outset whether the money is a gift or a loan, as this will have different tax implications. Make sure a proper agreement is drawn up as this has implications for your own financial planning.

  • Partners and spouses

If your child is moving in with a partner, you may want a say in how the rights to the property will be held should the relationship break down at some point. If your child is married, you should seek advice to ensure that your investment is ‘ring fenced’ and you do not lose your investment stake through divorce settlements

 

The end of high loan-to-value (LTV) mortgages?

The economic implications of the pandemic has reduced the availability of high loan-to-value (LTV) mortgages on which many buyers (especially first-time buyers) have usually relied. Data from Moneyfacts has shown a fall in the number of 90% LTV mortgages on the market which allow people to buy with just a 10% deposit. So, couples will need to find an increasingly large sum of cash to even consider buying. For a £200,000 house, from example, a 15% deposit is £30,000. Add on legal fees and moving expenses, and stamp duty after the current stamp duty holiday ends on 31 March 2021 [5], and it’s a large sum to find in the current economy.

 

Build it and they will come - perhaps

If ‘Build, Build, Build’ is how we will recover from COVID-19, then the Bank of Mum and Dad will remain centre stage. In the UK, there is still a limited supply of affordable homes. Changes by lenders in the wake of the pandemic have restricted the low-deposit mortgage options on which many young people rely to make their first step.

Generous parents, grandparents, family members and friends are gifting thousands towards deposits. While the Bank of Mum and Dad is helping those lucky enough to have their backing, a generation of hopeful buyers without the financial support of their parents could find themselves locked out of the housing market.

 

Call Panthera Wealth to discuss your options

If you want to help fund a house purchase for your children or grandchildren, call us first. We’ll review your current financial position, look at your own long-term requirements, and advise on just how generous you can be - or not. We can also discuss ways to secure your investment, or the most tax-efficient ways to gift money for property purchases. 

 

 

 

 

 

 

Source data:
  1. https://www.legalandgeneral.com/bank-of-mum-and-dad/ 
  2. https://www.gov.uk/government/collections/uk-house-price-index-reports  August 2020
  3. https://www.bankofengland.co.uk/statistics/money-and-credit/2020/august-2020 
  4. https://www.which.co.uk/money/mortgages-and-property/mortgages/mortgages-and-deposits-the-basics/how-much-deposit-do-you-need-for-a-mortgage-acs1c3t6f9r0 
  5. https://www.which.co.uk/news/2020/11/could-the-stamp-duty-holiday-be-extended/ 

 

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